The Curious Case of the iShares Italy ETF

The sovereign debt crisis in Europe that spanned much of 2010–and looks to carry over into 2011 as well–put a variety of European economies under the spotlight. Both major economies, such as Spain, and minor nations such as Ireland felt the heat from investors, citizens, and foreign governments alike, who were all growing increasingly concerned over how programs would be paid for and which would have to be cut in order to maintain solvency. Issues are also starting to crop up for Italy as well, but few investors are likely to have noticed given the apathy that most have shown towards the nation’s ETFs. According to our Country Exposure Tool, 53 different funds offer exposure to Italian securities and yet just four offer exposure exceeding 10% of their total assets to the country. In fact, only one fund offers near universal exposure to the country despite the massive size of the Italian economy. This main ETF tracking the Italian markets, the iShares MSCI Italy Index Fund (EWI) amazingly has less than $100 million in assets under management, even though it tracks the economy of one of the 10 biggest economic powers in the world [see all the ETFs in the European Equities ETFdb Category].

This is in sharp contrast to other comparable-sized economies that have amassed a great deal more in assets in their most popular ETFs. The main fund tracking the UK currently has over $1 billion in assets, while Brazil’s main ETF has close to $12 billion, even though both of the nations have roughly the same level of GDP as Italy. Even tiny Malaysia– a country that most Americans probably couldn’t find on a map– has its ETF, EWM, possess more than ten times the assets of EWI.

While it is hard to explain why investors have completely abandoned ETF investing in Italy, a couple of possible reasons come to mind. First off, Italy is a very mature market with low growth prospects; the country has a very low birth rate and seems poised to shrink population-wise heading into the next few decades. Political turmoil and budget issues haven’t helped matters either as investors have had to deal with a constantly changing regulatory environment and fears over the government being forced to pull the plug on expensive social programs in the near future in order to keep the economy moving at all.

However, with that being said, the nation has a wealth of dynamic assets to its credit as well. Tourism in the country remains strong while pockets of manufacturing across the nation continue to flourish and remain in demand across the world. In fact, the nation is the world’s 7th largest exporter, outpacing well-known exporters such as South Korea in the process. Furthermore, the nation has relatively solid relationships with a number of countries in key locations, such as emerging nations in North Africa and even Russia. These deals could make the nation better able to fight through any crises than some of its more developed market-focused peers such as the UK.

As a result of this complete oversight by investors, we have decided to take a closer look at the main fund tracking the Italian markets, in order to give investors a better idea of a fund that they probably have overlooked.

EWI tracks the MSCI Italy Index which measures the performance of the Italian equity market by investing in 32 Italian securities. It is heavily weighted towards three sectors; financials (32.2%), energy (27.2%), and utilities (17.1%) while offering minimal allocations to consumer staples and telecommunication firms. Its top individual holdings include oil giant ENI SpA (E) (18.7%), electricity and gas provider Enel SpA (10.5%), and banking firm Unicredit SpA (9.4%).

Although the fund has been rocked by the sovereign debt crisis over the past year, posting a loss of 15.3% in 2010, EWI does pay a relatively high dividend yield of 2.5% and has a PE ratio of 13.2. This suggests that for those seeking European investments in beaten down countries, EWI could make for an intriguing choice given its relatively overlooked status by investors and its exposure to securities most investors probably do not have a lot of exposure to in their current portfolios.

Disclosure: Author is long EWM and EWZ.

Disclaimer: ETF Database is not an investment advisor, and any content published by ETF Database does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. From time to time, issuers of exchange-traded products mentioned herein may place paid advertisements with ETF Database. All content on ETF Database is produced independently of any advertising relationships.

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3 Reasons Why The S&P 500 Is Still Significantly Undervalued At 1400

Wow, it certainly seems like more than five months since fears over a major credit event in Europe were peaking and the market dipped below 1100. Today, the market has risen to 1400 in what has generally been a strong and steady run since mid-October of last year.

In the beginning of the rally, the best performing stocks were big cap tech stocks like Apple (AAPL), IBM (IBM), and Microsoft (MSFT). Later, as the ECB stepped up its liquidity push and the economic data showed the U.S. economy was beginning to recover at a faster pace, banks and industrials joined the market's leadership.

Obviously we all know this now. Still, given that financials, tech stocks, and industrials have largely been the leaders of the rally, I think it is worth looking at these sectors' growth prospects and valuations today. Looking at analyst estimates, company's recent earnings commentary, and the positive but still slow growth we are seeing in the U.S economy, I think the S&P 500 (SPY) earnings are likely to come in between $105-115 dollars this year.

While the market has traded in the fairly wide range of 1000-1370 over the past several years, reflecting the equally wide range of earnings and growth estimates, there are some basic points bulls and bears can agree on.

First, interest rates are likely to stay low for some time. Second, earnings in most sectors are likely to grow at a faster rate over the next 2 years than they did during the previous 2 years. Third, taxes on investment and capital are not likely to rise significantly in the near term. Why is this?

The main reason that interest rates are likely to stay much lower for a longer period of time than in the past, besides a weak economy, is because of the continued difficulty that individuals and small business continue to experience in getting credit. While large companies with strong credit ratings have had no problem issuing short-term and long-term bonds, small businesses and individuals are still having a hard time getting access to credit lines, let alone ones at good rates.

The high debt load that many individuals and businesses still have are another reason why keeping interest rates low is likely to have added appeal for the Fed, even if the economic recovery begins to accelerate. Consumer spending is still the biggest driver of the U.S. economy, and if the consumer has to pay more for credit, it won't help the recovery.

With interest rates likely to remain low long after the economy recovers, it is likely that the Fed will be behind the inflation curve. Fixed income will also likely continue to have muted appeal to all but the most conservative investors in a steady but growth environment, where rates are lagging inflation. Even with growth prospects picking up with recent more positive economic reports coming out of the U.S., the Fed has remained exceedingly cautious in their language, and has similarly all but refused to discuss even the possibility of raising rates in the near-term.

Additionally, the second main reason I believe the market will remain undervalued at 1450 is that earnings estimates are now rising. While there is a healthy debate on whether earnings will grow this year at a single or double digit rate, as the U.S. and global economy continues to recover at a faster pace, earnings will likely continue to grow at least at a modestly stronger rate.

If the S&P 500 earnings come in between 105-115, the current market is likely barely at 14x trailing earnings. Presuming earnings accelerate at least modestly in the back half of the year, the market is likely trading at what is a very cheap historical multiple today.

Also, as earnings accelerate as the year goes on, the market is likely to find itself at less than 13x average estimates for 2013 earnings. If economic growth accelerates going into the back half of the year, the cyclical sectors like the financials and industrials are likely to see the biggest upwards earnings revisions. With leading industrials like General Electric (GE) and Caterpillar (CAT) trading at around 11-12x a very reasonable estimate of next year's likely earnings, valuations seem cheap by almost any historical standard.

Finally, the last additional reason why the market will likely continue to trade at the higher end of its historical price to earnings ratio is because of tax policy. Sure, with Obama approval rating over 50% now, and the deficit still very high, taxes on income and capital gains will likely increase at least modestly for those earning $250,000 or more. Still, I think tax policy will likely stay very friendly for the market.

While upper income earners of over $250,000 a year could see a rise in the capital gains tax from 20-25%, the house is likely to keep a rise in the capital gains tax modest. A 20-25% capital gains tax would be nearly 20% lower than what most upper income earners pay in ordinary taxes on the majority of their income. As an attorney I think it's important to note that any bill drafted to change the tax rates would have to originate in the house under Article 1 of the constitution.

If the capital gains tax is raised to 20-25% on upper income earners, it will likely have little effect on their investment strategy. Also, with the majority of institutional managed money being pension and retirement based funds, most of which are modestly to significantly underfunded, it is unlikely that a modest change in the capital gains tax for higher income earnings will change the strong appeal of equities in a low rate and modest growth environment.

So, what is the market likely to be valued at in the near-term if analyst estimates are within the ballpark of where earnings will come in? Certainly, with growth and earnings estimates still unclear, these numbers are anything but scientific. Still, given S&P 500 earnings are looking increasingly likely to come in the 105-115 range with growth likely to continue to accelerate at a modest but steady pace, I think the market is trading today at roughly 14x 2012 earnings.

The forward multiple of the market based on 2013 earnings estimates is likely in the 12.5 to 13 range. If we consider the historical range that stocks trade in during period of economic expansion as usually between 12-15x forward earnings, the market looks surprisingly cheap today. Additionally, since it is reasonable to presume that interest rates are likely to stay low indefinitely, and with capital gains taxes likely at similarly low levels, monetary and tax policy should continue to be very market friendly as well.

If we consider monetary and tax policy separate from the basic earnings and growth picture, it seems fairly reasonable to think the market should be trading at between 14-15x next years average earnings estimates of $115-130 on the S&P 500. This means the fair value of the market today is likely between 1550-1625.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Gaming Today: 2 Updates for This Operator

The following video is part of our "Motley Fool Conversations" series, in which consumer goods editor and analyst Austin Smith discusses topics across the investing world.

In today's edition, Austin looks at two big updates in the gaming world, both of which have big implications for Caesar's Entertainment. The sale of a St. Louis casino to Penn National gaming doesn't seem like the wisest decision he's ever seen. Fortunately, there is also good news as Wynn Resorts is withdrawing its plans for a casino based in Foxborough, Mass., which would have competed for the same casino license in The Bay State. Now, Caesars has a big runway for its planned East Boston casino.

Without a doubt, though, the best casinos of the past few years have been those that put a bull's-eye on emerging markets, not domestic ones. It's been a great strategy that extends well beyond the gaming industry. You can read about�"3 Companies Set to Dominate the World" in our new analyst report. It's free today, but won't be forever so click here to read it while you still can.

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First Quarter Performance Numbers Across Asset Classes

It's hard to believe that a quarter of 2011 has already passed us by, and before any more time passes, let's take a look at asset class performance numbers through the first three months of the year using the key ETFs that we track daily in our ETF Trends report over at Bespoke Premium.

Out of all the ETFs (or ETNs, Trusts, etc.) shown across all asset classes, silver (SLV) did the best in Q1 with a gain of 21.84%. Over the last month, SLV has gone up more than 11%, and it's up nearly 2% over the last week. The second best performing ETF on the entire list so far in 2011 has been the US Energy sector (XLE) with a gain of 16.85%. The Italy ETF (EWI) ranks third with a gain of 13.43%. Only two other ETFs on the list have gained more than 10% in 2011 -- France (EWQ) and the Deutsche Bank Commodities ETF (DBC).

Looking at just the major US indices, the Midcap 400 ETF (IJH) has done the best so far year to date with a gain of 8.84%. The Midcap Growth ETF (IJK) has done the best of the various large/mid/small and growth/value ETFs with a 2011 gain of 9.56%. Energy (XLE) has been the best performing US sector ETF, while Utilities (XLU) has gone up the least at 1.69%.

While Italy (EWI) has been the best performing foreign country shown, India (INP) and Japan (EWJ) are the only two that are down year to date at -6.35% and -5.45%, respectively. While oil (USO) gained 9.23% in the first quarter, it's somewhat surprising to see gold (GLD) only up 0.82% so far this year. What isn't surprising is that natural gas (UNG) declined 4.03% in the first quarter. Can anyone remember a time when natural gas didn't decline? Finally, all of the fixed income ETFs shown have declined so far in 2011 with the exception of one -- the inflation protected TIPS ETF (TIP).

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SunPower Beats Estimates, But Solar Sector Still Volatile

SunPower Corp. (SPWRA) reported fourth-quarter EPS of 47 cents (including 3 cents of accounting investigation expense), better than the Zacks Consensus Estimate of 34 cents. However, on a GAAP basis the company reported a quarterly EPS of 9 cents, compared to 20 cents in the third quarter of fiscal 2009.

Operational Results

SunPower generated $548 million of revenue in the reported quarter, compared to $465 million in the third quarter of 2009 and $398 million in the fourth quarter of 2008. The company’s Components and Systems segments accounted for 62% and 38% of quarterly revenue, respectively.

SunPower’s quarterly gross margin on a GAAP basis was 20.3% with an operating income of $43.0 million. In contrast, in the third quarter of 2009, the company’s gross margin was 21.5%, with an operating income of $46.2 million. However, the reported quarterly results include a benefit of $3.6 million, or 3 cents per share, in expenses related to its recently completed accounting investigation.

SunPower, on an adjusted basis, reported a quarterly gross margin of 21.7% with an operating income of $60.3 million. This is lower than the third quarter 2009 adjusted gross margin of 23.1%, with an operating income of $63.8 million.

SunPower in the reported quarter registered a gross margin of 21.5% in the Components segment while the Systems segment clocked a gross margin of 21.9%.

Financial Condition

At fiscal-end 2009, SunPower had cash and cash equivalents of $677.9 million, compared with $232.8 million at fiscal-end 2008. Long-term borrowings increased to $237.7 million at fiscal-end 2009 from $54.6 million at fiscal-end 2008. The company reported $121.3 million in cash from operating activities in fiscal 2009, compared to $154.8 million in fiscal 2008.

Guidance and Estimate Revisions Trend

SunPower in fiscal 2010 expects revenue in the range of $2.00 billion – $2.25 billion with an adjusted EPS of $1.25 – $1.65. This is in line with the Zacks Consensus Estimate of $1.37. Of this SunPower in the first quarter of 2010, expects revenues of $330 million – $350 million with an adjusted EPS of approximately $0.05.

SunPower has witnessed a mixed streak in earnings surprises over the past four quarters. The average is a positive at 28.77%, reflecting the volatility in the solar segment.

Should You Buy This Unknown Inflation Fighter?

In a recession, the last thing you usually need to worry about is inflation. But ever since the U.S. economy survived the worst of the market meltdown in late 2008 and early 2009, rising prices have threatened the recovery -- and raised the specter of inflation.

Remembering inflation
High inflation is something that many investors can't really remember. But 30 years ago, inflation was front and center in the economic debate. Then-unheard-of energy costs served as a tax on discretionary spending, crippling business activity and leading to conditions that could have caused a downward spiral for the entire U.S. economy. Inflation reached double-digit percentage rates, and the same Treasury bonds that now pay next to nothing fetched interest rates that would make your mouth water -- rates that only Annaly Capital (NYSE: NLY  ) , American Capital Agency (Nasdaq: AGNC  ) , and other mortgage REITs can match. It's somewhat ironic that today's extremely low rates are what make mortgage REITs' high yields possible.

By contrast, the inflation we've seen lately is only a shadow of those dark days of the late 1970s and early 1980s. Even with prices on food and energy at relatively high levels -- high enough to give companies like McDonald's (NYSE: MCD  ) some grief -- consumer price index figures have only risen by around 3.5% over the past year. But after seeing essentially no change in the CPI for a number of years, the return of positive price increases -- though beneficial to seniors whose Social Security benefits are indexed to the CPI -- has some wondering if the worst is yet to come.

Fighting the inflation battle
One well-known investor who's doing something about inflation is Bill Gates. The Microsoft co-founder recently reported a couple of interesting investments among his holdings -- investments that try to track inflation.

The particular investments that Gates chose are closed-end funds: Western Asset/Claymore Inflation-Linked Securities (NYSE: WIA  ) and Western Asset/Claymore Inflation-Linked Opportunities & Income (NYSE: WIW  ) . The two funds own substantial stakes in inflation-indexed income securities whose prices rise and fall in part with changes in inflation levels.

U.S. investors are familiar with what's known as TIPS -- Treasury inflation-protected securities. These bonds adjust their principal value automatically with changes in the CPI. Moreover, you can get access to TIPS through the iShares Barclays TIPS Bond ETF (AMEX: TIP  ) as well as some similar funds.

But how the funds that Gates chose differ from TIPS is that they invest not only in U.S. bonds but also similar inflation-indexed investments around the world. By owning foreign inflation-adjusted bonds of the type that the SPDR DB Int'l Gov't Inflation-Protected Bond ETF (AMEX: WIP  ) gives you, you get exposure to changes in price levels that reflect a variety of foreign currencies as well as differing levels of overall economic activity. The net result is more diversified protection against inflation.

In addition, closed ends have something that regular ETFs lack: the chance to buy at a discount. Currently, the discounts on the two inflation-fighting closed ends he owned are upward of 10%. Discounts not only let you buy shares on the cheap but also boost the effective yield on any interest distributions you receive -- a double benefit for savvy buyers.

Is it too late?
Surprisingly, the discounts on these two closed-end funds remain unusually wide -- even after news of Gates' purchases became commonly known. If you're looking for a cheaper way to give yourself some direct protection against price increases, then take a closer look at the Western Asset closed ends and see if they deserve a portion of the money you have allocated to fixed-income in your portfolio.

Closed-end funds and ETFs aren't just good for fighting inflation; they can help you make money, too. The Motley Fool's free special report on ETFs has three ETF names you should know; just click on the link to read it with no obligation to do anything more.

No Bailout for Greece–Yet

Greece’s hard-won agreement from political leaders in Athens was rejected late Thursday as not tough enough. Instead, Greece was told to go back to the drawing board, find more cuts, and give firmer assurances that the promised measures would actually be carried out.

Reuters reported that, after six hours of discussions, the decision was made to withhold the 130 billion euro ($173 billion) bailout unless Greece further cut its budget, passed legislation to implement the measures and ensured that all major party leaders committed support to the program in writing to forestall abandonment of the measures prior to elections.

In a Bloomberg report, Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, was quoted saying, “We can’t live with this system while promises are repeated and repeated and repeated and implementation measures are sometimes too weak.” He added, "In short, no disbursement before implementation."

Despite the urgency of the situation–Greece needs to receive bailout funding prior to a bond payment on March 20–the country’s two largest unions called strikes again Friday to protest the measures. In a statement, civil servants' union ADEDY said, "The measures included in the new [European Union/International Monetary Fund] memorandum and which the three political leaders agreed with the government and the troika are the 'tombstone' of the Greek society. It's time for the people to speak up."

Coming down on the opposite side of the issue, Fitch Ratings repeated its evaluation that Greece will default even with the rescue package. Tony Stringer, Fitch’s managing director of global sovereigns, was quoted saying that Greece “must get this deal agreed [to] really within the next few days to enable them sufficient time and have the new bailout money disbursed before that bond is due. If they don’t manage to achieve that, then it could be in the realm of a disorderly default.”

Some Numbers at Graham that Make Your Stock Look Good

There's no foolproof way to know the future for Graham (AMEX: GHM) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.

A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.

Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)

Why might an upstanding firm like Graham do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.

Is Graham sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to look at end-of-quarter receivables, but I've plotted both above.

Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. Graham's latest average DSO stands at 83.7 days, and the end-of-quarter figure is 69.5 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does Graham look like it might miss its numbers in the next quarter or two?

I don't think so. AR and DSO look healthy. For the last fully reported fiscal quarter, Graham's year-over-year revenue shrank 9.9%, and its AR dropped 36.4%. That looks OK. End-of-quarter DSO decreased 29.4% from the prior-year quarter. It was down 36.3% versus the prior quarter. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.

What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

• Add Graham to My Watchlist.

Stocks hover as Europe woes weigh

MARKETWATCH FRONT PAGE

Economic data, Facebook buzz and Wal-Mart earnings could help U.S. markets buck recent weakness even as Greece worries mount. See full story.

Spain clears bond sale, but borrowing costs up

Spain�s borrowing costs lurch again higher at a bond auction Thursday as mounting doubts over Greece�s future in the euro zone have spurred investor fears that other fiscally frail nations could be the next weak links in the currency bloc. See full story.

Europe stocks struggle, overshadowed by Greece

European stock markets pushed lower on Thursday amid a Spanish bond auction that showed rising borrowing costs, while persistent worries about Greece overshadowed the market, with banks out in front of the losses. See full story.

Stocks to watch Thursday: Boyd, HollyFrontier

A gambling acquisition and a batch of dividend increases will likely grab investors� attention as they sort through the corporate headlines early Thursday. See full story.

Why ETFs can�t �like� Facebook IPO

If you�re not getting a chance to buy Facebook Inc. shares before Friday�s IPO, you�re not alone. Some specialized exchange-traded funds will be on the sidelines along with most everyone else -- at least for a while. See full story.

MARKETWATCH COMMENTARY

This election was supposed to be all about the economy, but economic issues have faded into the background, at least temporarily, as Obama and Romney shore up support in their base, Rex Nutting writes. See full story.

MARKETWATCH PERSONAL FINANCE

Home prices in a majority of the markets covered in Zillow�s Home Value Forecast are set to bottom this year � if they haven�t already, according to a Zillow report released on Wednesday. See full story.

ETF Spotlight: PowerShares Buyback Achievers ETF

By JT

Buybacks are back in play. Looking to boost shareholder value, a number of companies have announced share repurchase agreements to buy back shares on the open market. Betting on one’s own company is usually a safe bet for executives, one which increases the earnings per share for a firm, and allows for a very good return on invested capital.

For stockholders, buybacks also push off a tax liability into the future. Theoretically, a dividend payment is inferior to share repurchases because of the tax liability paid by investors. Share repurchases increase shareholder’s ownership of a firm without taxes.

Buyback Achievers ETF (PKW)

The PowerShares Buyback Achievers ETF seeks to find companies buying back stock in much the same way some investors seek out dividend-paying firms. The rules-based ETF operates very simply on a few basic rules:

Included companies have to be incorporated in the United States

Each firm must trade on US exchanges

Firms must buy back 5% or more of their common stock in the trailing 12-month period

The requirements fuel higher turnover than other funds. Companies that repurchase 5% of their equity each year are quite rare – few can afford such a repurchase strategy for very long. More likely, companies meet criteria only for one or two years before cash outlays for share repurchase are scuttled as cash on hand is diminished.

Investment Methodology & Weighting

Any stocks meeting the three criteria above are put into the Buyback Achievers portfolio. Investments are market cap weighted, and capped at 5% of the portfolio.

The fund holds some 291 different firms, far more than one might expect given the very selective requirements for total share repurchases.

Personally, I like the fund’s inclusion requirements combined with the market cap weighting. Limiting the fund to companies that repurchase more than 5% of their common stock means it avoids firms that buy back shares solely to cover up stock option compensation to insiders. Also, the market cap weighting virtually ensures the fund is never taken by corporate diluters, who would find it very difficult to steal billions of dollars in shares by diluting the stock.

The 5% threshold is a bar set high enough that no stock will “accidentally” find itself as a position in the index. For a company to repurchase 5% of its equity, corporate leaders would have to view their company as a good wager at the current share price.

Industry Weight

Major holdings include consumer cyclicals (25.1%), technology (18.54%), health care (15.78%), industrials (11.65%), and consumer defensive stocks (8.33%). The heavy weighting of the fund to cyclical stocks makes this a fund for a turnaround.

Fees and Expenses

The fund carries a .7% annual expense ratio, which is higher than most market-cap weighted funds (Here are the 5 lowest cost ETFs). However, its small size and intriguing strategy make it inherently less cost-effective than large funds. Turnover and research costs undoubtedly add to the costs of managing this particular ETF.

Fund Performance

At the end of the day, it all comes down to total return. Here are the 5-year returns for PKW, as well as two other popular exchange-traded funds:

• PowerShares Buyback Achievers ETF (PKW): 23.42%
• SPDR S&P 500 ETF (SPY): 11.77%
• SPDR S&P500 Dividend ETF (SDY): 11.59%

Interestingly, the PKW ETF has bested both the S&P500 index as well as the S&P500 Dividend Index, which currently holds the 62 highest-yielding S&P500 components (more types of High Yield ETFs). As share repurchases are often compared to the alternative, dividends, it is interesting to see a buyback fund perform twice as well over the 5-year period as one of the most popular dividend ETFs. This is especially vexing since dividends provide half the total market return over long periods of time and yet, PKW’s buyback strategy exceeds even the dividend payers in SDY.

See the chart below, which compares the price of the funds over time:

Be sure to note that this performance chart above does not include dividends. We can conclude from the share price performance that total returns from the buyback fund are almost exclusively from appreciation in the fund NAV. This only confirms the view that most companies cannot sustain both a high dividend yield and 5% repurchases of common stock every year.

There are a few reasons why total returns for PKW outpace both the SPY and SDY ETFs:

Exposure – The PKW fund is unlikely to invest heavily in financial firms. While financial firms were among the largest buyers of their own equity before the financial crisis, few banks ever repurchased more than 5% of their equity in any given year. This fund is unlikely to hold major banks in the future, given that repurchases are now governed by the Federal Reserve’s stress test results. At the time of writing, the PKW fund held only 8.22% of its assets in financial services firms, compared to 13% for the S&P500 index. If seeking a combination of financials and extremely high yield, check out Preferred Stock ETFs.

Leverage – Companies that repurchase shares increase their operating leverage by decreasing their cash position to buy back stock on the open market. In a recovery, companies that consistently repurchase shares will perform better than average. However, in down markets, companies that repurchase share are unlikely to outperform.

Timing – The 5-year period is very forgiving to the PKW ETF. In 2009, at the bottom of the market, the fund held companies that were most active in doubling down their bets on their own equity. Anyone who purchased shares in 2009 should have done quite well in the following years. Likewise, the 3 year period from 2006 to 2009 sent the PKW index falling faster than the S&P500 index as fund holdings were purchasing shares at prices in excess of the value on the market – essentially wasting money on falling stock.

Bottom Line

This is a fund that I would expect to outperform a broad market index such as the S&P500 index over the longest of investment horizons. The methodology favors firms that are most confident about future earnings power. The exit strategy is also clearly defined, as the fund sells positions once the buyout bank balance runs too thin to sustain purchases. Repurchase agreements often send stock prices soaring as companies repurchase shares on the open market.

Disclosure: The author holds no positions in any of the above funds.

Job reports paint positive picture before U.S. data

NEW YORK (CNNMoney) -- Private-sector payrolls surged and planned job cuts eased in November, indicating some improvement in the job market and raising hopes for the government employment report due later this week.

The private sector added a seasonally adjusted 206,000 non-farm jobs in November, according to a monthly report issued Wednesday by payroll-processing company ADP. The company also boosted the number of private-sector jobs reported in October to 130,000 from the originally reported 110,000.

The ADP report trumped expectations. Analysts surveyed by Briefing.com expected private sector jobs to have increased by 125,000 in November.

In a separate report from outplacement consulting firm Challenger, Gray & Christmas, layoffs announced in November dropped slightly from the prior month -- though cuts in 2011 have already surpassed last year's total.

Challenger said 42,474 planned layoffs were announced in November, down 0.7% from October's total. That's the second straight drop after September's 28-month high of 115,730.

But job cuts announced this year are up 13% overall and now total 564,297 -- already more than 2010's full-year total of 529,973 -- with one month to go.

The reports come two days before the Labor Department issues its intensely watched monthly employment report. A CNNMoney survey of 21 economists forecasts that the economy added 110,000 jobs in November. That's compared to October, when 80,000 jobs were added to payrolls.

Most of the November gain will likely come from the private sector, where the prediction is for an addition of 135,000 jobs. That assumes they expect the government continued to lose jobs.

The unemployment rate is expected to stay unchanged at 9.0%.

Middle class jobs gone forever, but there's hope

Government and retail jobs, as well as those in the financial sector, have taken the biggest hit so far this year, the report showed. The government has announced cuts of more than 180,000 jobs this year, while retail has lost more than 48,000 and financial services 56,000.

Given the downsizing in the public sector, Washington, D.C., has had more announced layoffs this year than any state, with more than 98,000 cuts so far in 2011. California is next with just over 60,000 layoffs, followed by North Carolina with nearly 55,000 job cuts.

"Over the past six months, we definitely have seen a shift away from the heavy government job cuts at the state and local level toward increased job cuts at the federal level," Challenger, Gray & Christmas CEO John Challenger said in a press release.

Consumers continue to unload debt

"The worst may be yet to come, as cutbacks spread from the military to every other agency in Washington."

D.C. suffered more than 15,000 planned cuts in November alone, compared with 4,100 in California and 2,600 in New York.  

Stocks head for a second day of gains

NEW YORK (CNNMoney) -- U.S. stocks looked to extend gains Tuesday, as investors remained optimistic that leaders are making progress on addressing the eurozone debt crisis.

The Dow Jones industrial average (INDU), S&P 500 (SPX) and Nasdaq (COMP) futures were up ahead of the opening bell. Stock futures indicate the possible direction of the markets when they open at 9:30 a.m. ET.

A two-day meeting of eurozone finance ministers gets underway Tuesday and investors are hopeful of hearing more concrete details for a solution.

"We're still being held hostage by what's going on in Europe, but there's a little hope, a little optimism, that leaders will craft a solution that can solve the crisis -- or at least ward it off from becoming uncontrollable," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

Meanwhile, Moody's warned that 87 banks across 15 of the 17 eurozone countries could face downgrades and Italy auctioned €7.5 billion of 3- and 10-year bonds that drew the highest yields in years. Borrowing costs in Italy have been above the uncomfortable 7% mark for days but investors appear to be shrugging that off, for now.

World markets kept the momentum from the previous session early Tuesday, with investors continuing to cheer strong consumer spending and a possible pact between leaders aiming to take control of the eurozone's mounting debt.

European leaders are working on a new plan to ensure fiscal discipline across the euro area. The proposal is expected to give the European Union greater authority over the budget policies of individual eurozone nations.

Europe eyes new pact as debt crisis rages

"We've been teased with potential solutions before, but any effort that is demonstrable is enough to relieve the market of its worst anxieties," said Luschini.

Stocks rallied Monday following strong Black Friday sales and on optimism about a possible Europe solution.

World markets: European stocks were mixed in morning trading. Britain's FTSE 100 (UKX) ticked down 0.1%, the DAX (DAX) in Germany rose 0.1% and France's CAC 40 (CAC40) added 0.2%.

Asian markets ended with sharp gains. The Shanghai Composite (SHCOMP) and the Hang Seng (HSI) in Hong Kong climbed 1.2%, and Japan's Nikkei (N225) rallied 2.3%.

Economy: New data on home prices and consumer confidence will be released on Tuesday.

The S&P/Case Shiller index, a gauge of home prices in 20 major cities, dropped 3.6% in September compared to a year ago, following a 3.8% decline in the previous month. Analysts surveyed by Briefing.com expect prices to have dropped 3.0% versus a year ago.

The Conference Board's Consumer Confidence Index is expected to rise to 42.5 for the month of November, up from 39.8 in October.

Companies: Shares of Companies Tiffany & Co (TIF). sank 8% in premarket trading after the luxury jewelry retailer reported earnings that topped forecasts but reeled in its guidance for the fourth quarter.

American Airlines' parent company, AMR Corp. (AMR, Fortune 500), announced Tuesday that it has filed for Chapter 11 bankruptcy in order to "achieve a cost and debt structure that is industry competitive."

Shares of rival Southwest Airlines (LUV, Fortune 500) fell in premarket trading, while shares of United Continental (UAL, Fortune 500) edged higher.

Currencies and commodities: The dollar slumped against the euro, the British pound and the Japanese yen.

Oil for January delivery rose 70 cents to $98.91 a barrel.

Gold futures for December delivery added $4.50 to $1,750.30 an ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury edged lower, pushing the yield up to 2% from 1.96% late Monday.  

Downgrade-palooza Continues: S&P To Cut Portugal, Italy, Spain, Austria

The downgrades from Standard & Poor‘s keep coming, with anonymous government officials now identifying many more targets beyond France.

Now, insiders are saying Italy, Spain and Portugal will have their sovereign credit rating downgraded by two notches. Austria is also set to lose its Triple A rating along with France. Germany and the Netherlands are said to be safe from this round of downgrades.

Elsewhere on the Continent, Belgium said missed its 2011 budget target as set out by the EU’s stability program, as its sovereign debt rose to 98.1% of GDP, the highest level in nearly a decade.

Although European officials continue to remain mum on the topic, Irish Deputy Prime Minister Eamon Gilmore told journalists that he hoped the EU could continue in its progress to stabilize the sovereign debt crisis. S&P has also declined to confirm or deny any of the cuts yet.

1 Reason Tupperware Brands May Be Headed for a Slowdown

Here at The Motley Fool, I've long cautioned investors to keep a close eye on inventory levels. It's a part of my standard diligence when searching for the market's best stocks. I think a quarterly checkup can help you spot potential problems. For many companies, products that sit on the shelves too long can become big trouble. Stale inventory may be sold for lower prices, hurting profitability. In extreme cases, it may be written off completely and sent to the shredder.

Basic guidelines
In this series, I examine inventory using a simple rule of thumb: Inventory increases ought to roughly parallel revenue increases. If inventory bloats more quickly than sales grow, this might be a sign that expected sales haven't materialized.

Is the current inventory situation at Tupperware Brands (NYSE: TUP  ) out of line? To figure that out, start by comparing the company's figures to those from peers and competitors:

Company	TTM Revenue Growth	TTM Inventory Growth
Tupperware Brands	12.9%	4.9%
Emerson Electric (NYSE: EMR  )	15.1%	(0.2%)
Avon Products (NYSE: AVP  )	7.1%	0.3%
Mead Johnson Nutrition (NYSE: MJN  )	16.9%	27.8%

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. TTM = trailing 12 months.

How is Tupperware Brands doing by this quick checkup? At first glance, pretty well. Trailing-12-month revenue increased 12.9%, and inventory increased 4.9%. Over the sequential quarterly period, the trend looks worrisome. Revenue dropped 10%, and inventory grew 1%.

Advanced inventory
I don't stop my checkup there, because the type of inventory can matter even more than the overall quantity. There's even one type of inventory bulge we sometimes like to see. You can check for it by examining the quarterly filings to evaluate the different kinds of inventory: raw materials, work-in-progress inventory, and finished goods. (Some companies report the first two types as a single category.)

A company ramping up for increased demand may increase raw materials and work-in-progress inventory at a faster rate when it expects robust future growth. As such, we might consider oversized growth in those categories to offer a clue to a brighter future, and a clue that most other investors will miss. We call it "positive inventory divergence."

On the other hand, if we see a big increase in finished goods, that often means product isn't moving as well as expected, and it's time to hunker down with the filings and conference calls to find out why.

What's going on with the inventory at Tupperware Brands? I chart the details below for both quarterly and 12-month periods.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Source: S&P Capital IQ. Data is current as of latest fully reported quarter. Dollar amounts in millions. FQ = fiscal quarter.

Let's dig into the inventory specifics. On a trailing-12-month basis, work-in-progress inventory was the fastest-growing segment, up 10%. On a sequential-quarter basis, finished goods inventory was the fastest-growing segment, up 5.2%. That can be a warning sign, so investors should check in with Tupperware Brands' filings to make sure there's a good reason for packing the storeroom for this period. Tupperware Brands may display positive inventory divergence, suggesting that management sees increased demand on the horizon.

Foolish bottom line
When you're doing your research, remember that aggregate numbers such as inventory balances often mask situations that are more complex than they appear. Even the detailed numbers don't give us the final word. When in doubt, listen to the conference call, or contact investor relations. What at first looks like a problem may actually signal a stock that will provide the market's best returns. And what might look hunky-dory at first glance could actually be warning you to cut your losses before the rest of the Street wises up.

I run these quick inventory checks every quarter. To stay on top of the inventory story at your favorite companies, just use the handy links below to add companies to your free watchlist, and we'll deliver our latest coverage right to your inbox.

• Add Tupperware Brands to My Watchlist.
• Add Emerson Electric to My Watchlist.
• Add Avon Products to My Watchlist.
• Add Mead Johnson Nutrition to My Watchlist.

The Low-Risk Play on Unconventional Energy

Shale gas, oil sands, and many other unconventional sources of energy have revolutionized the industry. With the potential to eventually reverse the reliance of the U.S. on foreign sources of oil, unconventional energy sources have popped up both throughout the country and around the world. The companies that have tapped into those unconventional sources have seen spectacular rises in both price and popularity.

But every energy company comes with risk. That's why a new way to invest in alternative energy has so much promise -- but will it deliver? Let's take a closer look at this novel investment opportunity.

Going the ETF route
In the past several years, hundreds of new exchange-traded funds have appeared, covering any number of obscure, esoteric corners of the market. But with one new offering slated to start trading today, the ETF universe will gain from a targeted play on one of the hottest sectors of the stock market: unconventional energy.

The Market Vectors Unconventional Oil & Gas ETF will track an index of companies in the business of producing shale oil and gas, coalbed methane, and coal seam gas, along with "tight" sands, oil, and natural gas. With the apt ticker symbol FRAK, the ETF will carry a net expense ratio of 0.54%, which is fairly competitive with other focused-sector ETFs across the industry.

Given the number of small players involved in unconventional energy, this ETF may sound like a perfect opportunity to grab a mix of risky plays, giving you the maximum benefit of diversification. Unfortunately, although the ETF does include several dozen stocks, it falls short of its full potential by concentrating too heavily on some of the biggest companies in the space.

The usual concentration problem
To understand better what you're getting with the Market Vectors ETF, you need to turn to its underlying index. The so-called "pure play" index includes companies that "derive most of their revenues from unconventional oil and gas, or with properties that have the potential to do so" [emphasis added]. That additional caveat opens the door to well-established large-cap companies, which end up composing well over 80% of the assets of the fund. The top nine holdings alone make up over half the fund.

Granted, there's no denying that Chesapeake Energy (NYSE: CHK  ) and EOG Resources (NYSE: EOG  ) deserve a place in an unconventional energy ETF. Both companies have gone to great lengths to amass substantial positions in various shale gas areas, and both have been instrumental in spurring further development around the country.

It's just unfortunate when some of the most promising smaller companies in the business get so little play in the ETF. Low-cost leader Ultra Petroleum (NYSE: UPL  ) may have one of the most impressive cost structures in the natural gas industry, but the Market Vectors ETF only gives you a 0.9% position in the stock. Kodiak Oil & Gas (NYSE: KOG  ) seems like a natural growth play in the Bakken shale area, as it just added acreage in the area along with some pipeline facilities to boot. But it only gets a 0.6% allocation. And fellow Bakken company Northern Oil & Gas (AMEX: NOG  ) sports only 0.36% of the ETF's assets, yet it has managed to amass significant production without raising debt and as a non-operating company that's partnered up with drillers.

Is this what you want?
Despite its shortcomings, the Market Vectors ETF will very likely perform in line with energy prices overall and with the state of the unconventional energy industry in particular. With more than 70% of the ETF's holdings based in the U.S., any federal regulations governing hydraulic fracturing or other common unconventional techniques would have a big impact on all of its holdings.

So if you're looking for general exposure to unconventional energy, the Market Vectors ETF will get the job done adequately. However, if you really want to focus on the riskiest plays in the sector, you'll need to supplement the ETF with bigger positions in the small stocks that the ETF largely neglects.

If you like energy stocks, we've got one that could knock your socks off. Read about it right here in The Motley Fool's special free report on the energy industry and its best prospects. It's free, but only available for a limited time.

Amgen To Near $100, Outperforming Pfizer

Despite trading at 117% above its 5-year average PE multiple and a "hold" rating, Amgen (AMGN) still has strong upside after assuming for multiples contraction. The same goes for Pfizer (PFE), which is roughly at its 5-year average PE multiple. Even though Pfizer is preferred on the Street, I find greater upside for Amgen based on my DCF model.

From a multiples perspective, Amgen is the cheaper of the two. It trades at a respective 16.7x and 10x past and forward earnings, while Pfizer trades at a respective 19.1x and 9x past and forward earnings. On the other hand, Pfizer offers a dividend yield that is double that of its competitor at 4.2%.

At the fourth quarter earnings call, Amgen's management noted a favorable close to 2011 and several catalysts for this year:

"As you've seen from our results for the fourth quarter, we ended the year with momentum, and we expect 2012 to be even stronger. I'll touch on some of the highlights. We entered 2012 with our Neulasta franchise growing, with Enbrel maintaining its market leadership and more stable outlook for EPOGEN, particularly now that we have long-term contracts in place. Prolia and XGEVA are obviously the important part of our outlook for 2012 and beyond. And we will build on the solid foundations that we have established for these brands with launches expected in new countries throughout 2012. We are obviously looking forward to the upcoming ODAC review of XGEVA for bone mets prevention, but I think it's important to emphasize the early progress that we've made and the biggest opportunity for XGEVA, which is with patients whose cancers have already spread to bone. In this setting, XGEVA is both driving the growth of the market and taking share, a trend which we expect to continue".

The only problem is that Xgeva appears to not have demonstrated clinical benefits for non-met high-risk CRPC patients. Accordingly, many analysts are doubting whether Xgeva will win approval. This prostate cancer bone met prevention production was estimated to have $5 accretion to shareholder value. On the other hand, fourth quarter was impressive in light of sales stabilization for Epogen and traction for Prolia. Furthermore, shortcomings of Xgeva are likely to be offset by strong blinatumomab Phase II data.

Consensus estimates for Amgen's EPS forecast that it will grow by 13.5% to $6.05 in 2012, and then by 10.7% and 12.5% in the following two years. Modeling a CAGR of 12.3% for EPS over the next three years and then discounting backwards by a WACC of 9% yields a fair value figure of $95.77, implying 42.2% upside.

Pfizer had solid performance during the fourth quarter with operational growth of 12% in emerging markets. This shift over to greater exposure in high-growth regions is doubly attractive in light of how Pfizer has multiple blockbuster drugs in its portfolio. The partnership with GlaxoSmithKline (GSK) will also drive a sustainable stream of free cash flow, as cuts in unnecessary R&D drive up margins. On the other hand, the expiration of Lipitor's exclusivity as competitive pressures loom against other drugs present headwinds for top-line momentum. Setbacks to several high-profile drugs are further preventing investor entry.

Consensus estimates for Pfizer's EPS forecast that it will decline by 1.7% to $2.27 in FY2011 and then grow by 3.1% and 3.8% in the following two years. Assuming a multiple of 12x and a conservative FY2012 EPS of $2.31, the rough intrinsic value of the stock is $27.72, implying 31.7% upside.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMGN, PFE over the next 72 hours.

Where Next for ExxonMobil (XOM) Shares?

When you think of Big Oil, one of the first companies that comes to mind is ExxonMobil (NYSE: XOM).� The Dow Jones Industrial Average component is the biggest non-state-owned oil company in the world, and it�s gained a reputation as one of those safe and steady stocks that every prudent investor should own.� Unfortunately, XOM hasn�t lived up to that stalwart reputation.�

Over the past five years, the stock is actually down 5.43%.� So far in 2010, the oil giant�s shares have declined �9.88% (as of Sept. 22).� That�s not exactly what you�d call stalwart performance.� Moreover, in June XOM shares hit multiyear lows, sinking to their lowest point since December 2005.� Yet despite XOM�s woes, in the past three months the stock has come back off of the canvas.� Shares are up 2.30% over that time period, as investors once again start to nibble on the oil giant.� Now the question is: Which way will XOM shares go next?� Here are the pros and cons of this big oil stock.

Pros

Refined mega-profits.� In July, ExxonMobil posted a second-quarter profit of $7.56 billion, or $1.60 a share. That was a jump of over 90% from the $3.95 billion, or 81 cents per share, the company earned in the same quarter a year earlier.� The earnings easily bested the consensus forecast for earnings of $1.46 per share.� The Q2 beat came largely as a result of a strong rebound in the company�s refining business, a segment that was beat down hard by declining demand resulting from the worst of the recession.�

A changing model. Although ExxonMobil has seen a rise in its refining business, the company is not relying on this rather fickle segment for its future sustenance.� In fact, the company now is selling off refining and other non-core assets to focus on exploration and production. According to analysts from JPMorgan, many big-cap energy companies like ExxonMobil are selling off fuel stations, pipelines and refineries, and boosting spending on oil and gas production in unconventional oil and gas reserves such as rock formations and oil sands.� This strategic shift by ExxonMobil could turn out to be a big net positive for the company if oil prices climb.

Solid dividend and yield. Even though the share price performance of XOM has languished in recent years, the company continues to payout a healthy dividend.� ExxonMobil shareholders receive an annual dividend payout of $1.76 per share, which at current price levels represents an attractive dividend yield of 2.90%.

Cons

The economics of oil. Compared to just a couple of years ago, oil prices are trading way down.� At about $73.50 per barrel, the price of crude has been relatively weak.� The reasons for the current economics in oil are actually fairly simple.� First you have anemic global economic growth, which essentially means lowered demand for oil.� Then there�s the absence of any serious inflation pushing commodity prices higher. Finally, oil inventories are currently well above historical averages.� Lower oil prices don�t bode well for Big Oil�s bottom line, and the economics of oil could keep a cap on profits — and the value of XOM shares.

Technical resistance.� Although there has been some nice movement off of the recent lows, XOM shares still trade well below their long-term, 200-day moving average. Plus, there is quite a bit of technical resistance around the $64-$66 level, and that resistance could cause any budding rise in XOM shares to stall. �

A bevy of downgrades. Despite the fact that XOM shares have come back off of their 2010 lows, the analyst community seems to have turned their back on the oil giant.� Last week ExxonMobil shares received downgrades from Deutsche Bank and RBC Capital.� Deutsche Bank (DB) lowered its rating on XOM to hold from buy and cut its price target from $70 to $65. RBC Capital lowered its rating on XOM to sector perform from outperform while cutting its price target from $76 to $70. In late June, Goldman Sachs lowered its earnings estimates for XOM through 2012, saying that ExxonMobil�s acquisition of XTO Energy will be dilutive to earnings. Goldman currently rates the stock as neutral with a $65 price target.� This analyst coverage is anything but glowing, and it shows that Wall Street remains unimpressed by XOM�s future prospects.

Verdict

The metrics in the oil patch, the technical resistance XOM shares face and the uninspiring opinion of the analyst who cover the stock, I think the cons win the argument on the future of ExxonMobil.� If you�re an investor who cares primarily with dividends, and you don�t plan to sell the stock anytime soon, then maybe XOM shares are a good fit for your portfolio.� However, if you�re looking to see any significant upside in the shares, there are scores of better candidates than this oil behemoth.

12 Little-Known Stocks That Will Lead the Mobile Internet Revolution.� All my research and proprietary stock picking tools are ringing loud and true right now — mobile Internet is one of the biggest money-making opportunities out there. And these stocks are about to take the Street by storm. Get their names here.

18 Principles That Make Rich Traders So Successful

Trading in the stock market is like being in a Monopoly board game of ten total people and one person will end up winning the majority of everyone else’s money before the game is over. This is much like in trading where 10% of traders are profitable and the other 90% lose or just break even in the long term.

If the 1 in 10 Monopoly winners consistently won game after game then you would want to know what they were doing differently than the other nine consistent losers. Well I do not know what the Monopoly winners were doing but here are what rich traders are doing differently.

These principles were compiled after 13 years of successful trading and studying the winning traders through out history, Livermore, Darvas, O’Neil, Micheal Covel’s Trend Followers, Jack Schwager’s Market Wizards and many more. I also sent these principles to many rich traders and market historians to double check my findings like John Boik, Alexander Elder, and Chris Kacher and many others.

I got two thumbs up. So for a free short cut to learning how to win in the markets here you go. (Of course the next step will be do you understand these principles? Many are very counter intuitive.)

PSYCHOLOGY

New Traders are greedy and have unrealistic expectations. Rich Traders are realistic about their returns.

New Traders make the wrong decisions because of stress; Rich Traders are able to manage stress.

New Traders are impatient and look for constant action. Rich Traders are patient.

New Traders trade because they are influenced by their own greed and fear; Good Traders use a trading plan.

New Traders are unsuccessful when they stop learning; Rich Traders never stop learning about the market.

RISK

New Traders act like gamblers; Rich Traders operate like a businessperson.

New Traders bet the farm, Rich Traders carefully control trading size.

For New Traders outsized profits are the #1 priority, for Rich Traders managing risk is the #1 Priority.

New Traders try to prove they are right. Rich Traders admit when they are wrong,

New Traders give back profits by not having an exit strategy. Rich Traders lock in profits while they are there.

METHODOLOGY

New Traders give up and quit, Rich Traders persevere in the market until they are successful,

New Traders hop from system to system the moment they suffer a loss. Rich Traders stick with a winning system even when it’s losing.

New Traders place trades based on opinions. Rich Traders place trades based on probabilities,

New Traders try to predict. Rich Traders follow what the market is telling them.

New Traders trade against the trend; Rich Traders follow the markets trend.

New Traders follow their emotions which puts them at a disadvantage. Rich Traders follow systems that give them an advantage.

New Traders do not know when to cut losses or lock in gains, Rich Traders have an exit plan.

New Traders Cut profits short and let losses run. Rich Traders let profits run and cut losses short.

*Post courtesy of Steven Burns at New Trader U.

 

Noble: Why This Driller Is Close to My Heart

For companies like Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL), 2008 set a high-water mark for earnings that won't be easily surpassed. Last year saw these oil service companies' pre-tax earnings drop 43% and 47%, respectively. For Noble (NYSE: NE), however, the only place you'll find a high-water mark is on the hull of one of its offshore drilling rigs.

The offshore drilling contractor notched a new record in 2009, with pre-tax earnings lifting 5% to $2 billion for the year. The fourth quarter capped off this fine year with contract drilling margins riding high at 70%, and rig utilization at 83%. Per-share net income came in at $1.72, which was well ahead of analyst expectations.

Importantly, Noble's accounting earnings are backed up by solid cash generation; in this case, $2.1 billion for the year. Of that amount, $1.4 billion was directed to capital expenditures, while the rest either fattened up the company's already pristine balance sheet or was returned to shareholders through buybacks and dividends.

The performance here has been rock-solid, and I'm not surprised to hear the CEO express frustration with the share price. The stock sports a trailing price-to-earnings ratio of 6.55, which would suggest that Noble is poised on the precipice of a cyclical downturn. If 2009 couldn't usher one in, it's hard to see how 2010 could do so.

One industry forecast has capital spending rising by 12% this year, with a 16% bump in spending by national oil companies (NOCs) like Petrobras (NYSE: PBR) and Saudi Aramco. Between the reasonably strong oil price and the ongoing success of explorers like BP and Anadarko Petroleum (NYSE: APC), it's hard to see Noble or peers like Ensco (NYSE: ESV) and Transocean (NYSE: RIG) having anything other than a pretty solid year ahead.

Noble repurchased $187 million of shares at an average price of $34 last year. While the shares are by no means expensive today, the mid-$30 level would be a fantastic point to fill out a position in this regal driller. The shares tend to be more volatile than the results here, so I wouldn't be at all surprised to see such prices offered up later this year.

Disclosure: Author doesn't have a position in any company mentioned.

U.S. stocks cautious ahead of Fed

MARKETWATCH FRONT PAGE

U.S. stocks fall as Wall Street looks to the afternoon release of minutes from last month�s Federal Reserve meeting for hints of more stimulus. See full story.

Decoding the Facebook-Yahoo deal

The strategic alliance between Facebook and Yahoo might actually bring real benefits to both partners. See full story.

A hole in the bucket drains the recovery

The economy is still weak because our trade deficit is draining away much of the growth we�ve managed, reports Al Lewis. See full story.

U.S. trade deficit lower in May; exports rise

The U.S. trade deficit falls back under $50 billion for May on a slight increase in exports and a drop in the cost of imported oil, data show. See full story.

No one wants to be a safe haven anymore

Every time investors think they�ve found a safe haven, authorities slam the door in their face, writes Matthew Lynn. But if you can figure out what the next safe haven will be, you can ride it out as it soars in value. See full story.

MARKETWATCH COMMENTARY

Writing on the Wall drove across America to relocate on the West Coast. Ten days on the road the column found an America in debt, under- or unemployed, signs of stimulus, lingering housing woes, unemployment and new technology. See full story.

MARKETWATCH PERSONAL FINANCE

It�s a situation that seems to defy supply-and-demand logic: If there�s more demand in the housing market, wouldn�t the cost of borrowing funds to buy a home be significantly on the rise? See full story.

Playing a Potential Downturn With 5 Stocks

In a matter of just a few weeks, investor complacency has been replaced with worry, fear, and anxiety – and for good reason. Much has been said and written about how spiking crude oil prices are hurting people at the pump. The more consumers pay at the pump, the less they have to buy other goods and services. This is true, of course. But what isn’t talked about as much on Main Street is the negative impact the rising crude prices will have on corporate America. It will be costlier to make products, run facilities, and transport goods. This will cut into margins and ultimately into earnings. While it is easy to see and feel the rise in crude prices when filling up the tank, the bigger economic problem is lurking on companies’ income statements, and that won’t fully be understood until first quarter earnings are released.

Unfortunately, there are other concerns and issues that have been masked by the stock market’s unwavering run. Speaking of that run, it has been said that over 50% of hedge fund managers believe that the stock market’s gains have largely been fueled by the investments generated from "QE2." What happens when that goes away in June? The housing crisis is still just that – a crisis. Many countries in Europe are still in financial distress. And, here at home, municipalities across the land are facing dire budgetary issues, forcing local governments to cut jobs, or cut back on employees’ hours. This, clearly, is not a positive for the labor market, nor is it for the fragile economic recovery. While few will are predicting another recession at this point, many analysts do feel that a pull-back – perhaps a potent one – may be on the horizon. With that in mind, I wanted to point out a few stock ideas that may work in a difficult economic climate.

Get in "The Zone"

During difficult economic times, one of the last purchases a consumer wants to make is one that comes attached with a five or six year payment commitment. Car sales are hit particularly hard during recessions. One stock that is essentially a play on a challenging auto environment is AutoZone (AZO). As many people are aware, the company is a retailer of auto replacement parts and accessories. Since the economic downturn struck, many people have been demanding more and more out of their current vehicles. This, logically, means that more replacement parts and repairs will be needed to get extra mileage out of those cars. This trend has been evident in its financial results and its stock performance. For instance, from early November 2007 through early March 2009 (the collapse of the stock market), shares of AZO were actually up 26% compared to the staggering 55% drop for the S&P 500. With the recent volatility, the stock has cooled off a bit, although it has exhibited good relative strength. For a much more thorough look at its technicals, please access our trading report by clicking on its ticker above.

Real Estate a Real Problem

In the paragraph above, we laid out a stock that fares well when times are tough for auto makers. Similarly, there is a stock that is essentially a play on the disaster that is the housing market. RealPage (RP) is not be a name that many investors and traders are familiar with, despite the fact that the stock is up ~120% versus its August 12 IPO price of $11. For those who may not be familiar with the company, RP is a Software-as-a-Service provider for the multi-family rental housing industry. Its software, which caters to landlords and property owners, helps them to market, price, screen, and lease their properties. Over the past couple of years, the rental housing market has seen an influx of activity as single family homes, condos, and townhouses have floundered. With many analysts expecting more pain in the housing industry in the year(s) ahead, RP looks like a safe bet for investors. Furthermore, the stock’s recent slide has put it at a key support level, which sets up an opportune entry level. To learn more about RP’s specific entry/exit levels, please view our trading report by clicking on its ticker below.

Trade-Down Effect on the Menu

With consumers feeling the pinch at the pump, their appetite for more expensive dining options is likely to wane. However, while people may have a little less money in their wallets, they haven’t been given more time in the day. This combination of lower discretionary income and perpetual time crunches is a good recipe for the world’s largest fast food chain – McDonalds (MCD). The other inflationary pressure that has garnered many headlines is rising food costs. Increasing dairy, wheat, and cattle costs could put a squeeze on its margins, but it also could work out in its favor. The restaurants that stand to take the brunt of food inflation are those that either don’t have brand loyalty or don’t have pricing power. As the most recognizable name in the space, and with its everyday dollar menu, MCD has both. This, too, is evidenced by its impressive relative strength during the recession. From November 2007 through the end of March 2009, shares of MCD only lost 7%. Since then, the stock has gained 33%.

A Pair of ETFs to Consider

An alternative strategy to picking single stocks is to consider ETFs that offer some protection versus downturns in the market and/or increasing volatility. The good news for traders and investors is, with the prolonged run and accompanying complacency, it has become quite cheap to buy protection. For instance, the ProShares UltraShort S&P 500 (SDS) is trading near its lowest levels since its inception in July 2006.

However, if taking a short position isn’t your "cup of tea", the iPath S&P 500 VIX Short-Term Futures ETF (VXX) offers another option. It is a play on an expected increase in volatility, and tends to move higher when stocks are under pressure. Like SDS, this ETF is also trading at historically low prices. In both cases, though, there is primary resistance levels overhead that traders should be aware of, so we urge our readers to take a look at our trading reports before entering a position.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Our Trading Reports on Stocks Mentioned in This Article:

• AZO
• RP
• MCD
• SDS
• VXX

Tech stocks close day with mixed results

SAN FRANCISCO (MarketWatch) � Mild market reaction to Apple Inc.�s stock on the day the company released its latest version of the iPad colored trading action Friday on what ended up being a mixed day for tech stocks.

Click to Play Apple's new iPad goes on sale

Shoppers began purchasing the third-generation iPad on Friday, as the technology giant tries to widen its lead in the fast-growing market, Tomi Kilgore reports. (Photo: Getty Images)

Apple AAPL , which had flirted with reaching $600 a share on Thursday, fell early and ended the day with a gain of just a penny at share at $585.57 a share as consumers waited in lines to be among the first to buy the newest model of the iPad. Read more about the release of the new iPad.

With Apple in the spotlight, the Nasdaq Composite Index COMP �fell just 1 point to close at 3,055. The Philadelphia Semiconductor Index SOX �and the Morgan Stanley High Tech 35 Index MSH managed to edge into positive territory by the closing bell.

/quotes/zigman/68270/quotes/nls/aapl AAPL 615.70, +7.91, +1.30%

Gainers included cloud-based software firms Demandware Inc. DWRE , which rose $3.41 a share, or more than 14%, to close at $27, and chip maker M/A-Com Technology Solutions Holdings Inc. MTSI , up $1.20 a share, or almost 6%, to end the day at $21.75, a day after both stocks made their public-trading debuts.

Small advances also came from Dow components International Business Machines Corp. IBM and Cisco Systems Inc. CSCO �as well as Texas Instruments Inc. TXN �and online-travel site Priceline.com Inc. PCLN

Among leading tech stocks in red, decliners included Netflix Inc. NFLX , Oracle Corp. ORCL , Micron Technology Inc. MU �and Dell Inc. DELL . Read about whether Dell�s purchase of SonicWall is �material� in Rex On Techs.

Show Me the Money, Sherwin-Williams

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Sherwin-Williams (NYSE: SHW  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Sherwin-Williams generated $582.0 million cash while it booked net income of $441.9 million. That means it turned 6.6% of its revenue into FCF. That sounds OK.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Sherwin-Williams look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 16.5% of operating cash flow coming from questionable sources, Sherwin-Williams investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 11.1% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 20.9% of cash from operations.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

• Add Sherwin-Williams to My Watchlist.

EMC: Piper Sees Q3 Upside; Focus On Flash-Based Server

Piper Jaffray’s Andrew Nowinski this morning offers a preview of EMC‘s (EMC) Q3 report, expected on October 18th, before the market opens.

Nowinski, who has an Overweight rating on EMC shares, expects “modest upside” to consensus revenue estimates. He is modeling $5.02 billion in revenue and 37 cents per share in profit, compared to the Street’s average estimate of $4.92 billion and 37 cents. The consensus would be just 2% quarter-to-quarter growth, and EMC has averaged Q3 growth of 5% over the last eight years. Also, the company’s beaten consensus by $90 million, on average, for nine quarters in a row.

Nowinski is upbeat about the company’s flash storage-based server product, “Project Lightning,” which, I suppose, competes in some respects with products from Fusion-IO (FIO):

We believe EMC�s Project Lightning is set for general availability in late Q4. Based on conversations with industry contacts, we believe the company has a number of customers already beta-testing the server-based flash storage solution. The primary difference between this and other PCIe solutions is that this will incorporate EMC�s FAST VP storage tiering software, which we believe could represent a significant advantage for EMC.

4 Value Stocks Worth Buying and 1 To Avoid

Recent economic shocks have seen many companies fall into disfavor with investors, either due to their poor fundamentals, falling earnings or exposure to industries in which investors have lost confidence. This has created a feast for bargain-hunting investors with a substantial number of companies trading at deep discounts to their book value per share. In this article, I have reviewed five stocks that are all trading, at the time of writing, at a discount to their book value. The aim is to find, through the application of my unique analysis, those that are worthwhile investments. I have found four stocks: MetLife (MET), Viacom (VIA), Brookfield Office Properties (BPO) and MFA Financial (MFA) that I believe warrant further investigation as value investment opportunities and one, Nokia (NOK), that doesn't. As always, use my analysis as a starting point for conducting your own due diligence prior to investing.

MetLife Inc

MetLife is the largest listed US life insurer by market cap, $38 billion. The company provides insurance, annuities and employee benefit programs, primarily in the United States, Japan, Latin America, the Asia Pacific, Europe and the Middle East. It has a 52 week trading range of $25.61 to $48.72, and its price since the start of 2011 has dropped by 19% to around $36. At its current trading price, it has a price to earnings ratio of 7.

MetLife is currently trading at around a 37% discount to its book value per share of $57.44, and is delivering a return on equity of 11%, leading me to believe that it presents as a compelling value investment. In order to confirm this, I will examine the company's recent performance and compare it to its competitors.

Firstly, MetLife's financial position has improved during the third quarter 2011, with earnings rising by 20% to $20.5 billion and net income by a massive 190% to $3.6 billion. MetLife's balance sheet strengthened during this period, with a 4% rise in cash and cash equivalents to $10 billion, and a 6% drop in long-term debt to $60 billion. However, MetLife has recently announced that it will exit the mortgage business and close down its mortgage originations unit, which is expected to have a cost of $90 million and impacting its future cash position.

Metlife also compares favorably to its competitors. Prudential Financial (PRU) has a market cap of $26 billion, and is down 7% since the start of 2011, trading at around $55, with a price to earnings ratio of 9. This price represents a 30% discount on its book value per share of $78.11 and it has a return on equity of 9%.

Genworth Financial (GMICF.PK) has a market cap of $3.8 billion and is down 43% since the start of 2011, trading at around $8. This is a discount of 77% on its book value per share of $35.39, and it has a return on equity of -1%. MetLife is delivering a superior return on equity to both competitors and is trading at a deeper discount to Prudential Financial, but at a shallower discount to Genworth Financial.

MetLife's increased future earnings and income growth potential is also apparent when we consider that it has an exceptionally low PEG ratio of 0.14, which bodes well for future earnings growth. When this is considered in conjunction with a strong balance sheet that has a relatively conservative debt to equity ratio of 0.73, it is clear that MetLife is well positioned to grow earnings as the economy improves.

Another attractive reason for buying MetLife is that despite trading at a discount to its book value, the company is paying a dividend of 74 cents per share, which equates to a handy dividend yield of 2%. Furthermore, when considering MetLife's earnings yield of 14%, which is more than six times current ten year Treasury bond yields, it is clear that the stock has been unfairly valued by the market.

For all of these reasons, I don't believe that MetLife will see any further significant price drops, and at its current price, it is a compelling value investment opportunity. I would expect MetLife, on the basis of its strong fundamentals, to rise in value, and it is therefore, it is a solid candidate for further research and analysis.

Viacom Inc

Viacom, with a market cap of $25 billion, is the fourth largest entertainment and cable TV content company in the US. It connects with audiences through compelling content on television, motion picture, Internet and mobile platforms through various entertainment brands both in the US and internationally. It has a 52 week trading range of $44.10 to $60.90, and it has seen its price rise by 17% since the start of 2011, to be currently trading at around $53. At its current price, it has a price to earnings ratio of 15.

Viacom is a solid value investment candidate with a current trading price of $53, which is a 68% discount to its book value per share of $167.92, and a return on equity of 24%. In order to confirm this, I will examine the company's recent performance and review some of its competitors.

For the third quarter 2011, Viacom reported an 8% increase in earnings to $4 billion, with net income remaining steady at around $576 million. During this period, its balance sheet strengthened with cash and cash equivalents rising by 7% to $1 billion, although long-term debt rose by 6% to $7 billion.

In comparison to its competitors, Viacom shapes up quite well as a value investment opportunity. Time Warner Cable (TWC) has a market cap of $21 billion and is down 1% since the start of 2011, trading at around $65 with a price to earnings ratio of 15. It is trading at a 176% premium to its book value per share of $23.54, with a return on equity of 18%.

TiVo (TIVO) has a market cap of $1.23 billion, and is up 16% since the start of 2011, trading at around $10, with a price to earnings ratio of 20. It is trading at a 308% premium to its book value per share of $2.45, with a return on equity of 25%. Both of Viacom's competitors are trading at substantial premiums to their book values, yet with price to earnings ratios and returns on equity similar to Viacom.

Viacom's future growth prospects are also quite strong, as it has a solid balance sheet with a conservative debt to equity ratio of 0.85 and a profit margin of 14.21%, indicating the company is well-positioned to capitalize on any uplift in the economy. I also believe a further indicator of Viacom being undervalued by the market, is its earnings yield of 7.6%, which is more than double current ten year Treasury bond yields. For all of these reasons, I believe that Viacom is an excellent value investment opportunity that is significantly undervalued by the market, and is worthy of further investigation and analysis.

Brookfield Office Properties Inc

Brookfield is the largest property management company in the US by market cap of $8 billion. The company owns, develops and manages commercial properties, as well as providing ancillary real estate service businesses, such as tenant service and amenities. The firm invests in North American real estate markets with a focus on cities, including New York, Boston, Washington D.C., Toronto, Calgary, Denver and Minneapolis. It has a 52 week trading range of $12.80 to $20.07, and since the start of 2011, its price is down by 6%, and is trading at around $16, with a price to earnings ratio of 4.

At its current price, Brookfield's is trading at a 20% discount to its book value per share of $20.41, while delivering a return on equity of 25%. This I believe makes it a solid value investment opportunity and a candidate for further investigation of its performance and how it compares to its competitors.

For third quarter 2011, Brookfield reported a massive 50% rise in earnings to $1 billion, but reported a 28% drop in net income to $415 million. For this period it also strengthened its balance sheet with cash, and cash equivalents rising by a massive 106% to $358 million, although long-term debt rose by 64% to $10.61 billion.

In comparison to its competitors, Brookfield presents as a solid value investment opportunity. CBRE (CBG), the second largest property manager by market cap of $5.7 billion, is down 18% since the start of 2011, trading at around $17, with a price to earnings ratio of 22. With a book value per share of $4.18, it is trading at a 307% premium to its book value, with a return on equity of 20%. Jones Lang Lasalle (JLL), the fourth largest property manager by market cap of $3 billion, is down 21% since the start of 2011 and is trading at around $67. It is trading at a 44% premium to its book value per share of $37.79. Brookfield's is trading at a lower discount to book value than both CBRE and Jones Lang LaSalle but with a superior return on equity to both.

Brookfield has a solid balance sheet indicated by its very conservative debt to equity ratio of 0.94, which when coupled with its increased cash position means it is well positioned to capitalize on any future growth opportunities. Furthermore, the company has solid future growth prospects when its low PEG ratio of 0.02 is considered. Despite trading at a discount to its book value Brookfield's still pays a dividend of 56 cents per share, which is an attractive yield of 3.5%. I further believe that the company is undervalued by the market as its earnings yield of 25%, is more than ten times current ten year Treasury bond yields, is considered.

For all of these reasons, I believe that Brookfield's is unfairly valued by the market, and at current prices, represents a solid value investment opportunity that should rise in value. Accordingly, I have no hesitation recommending the company as a candidate for further investigation and analysis.

MFA Financial Inc

MFA Financial is the seventh largest listed diversified REIT in the United States by market cap of $2.5 billion. It invests in residential agency and non-agency mortgage-backed securities that are secured by hybrid mortgages, adjustable-rate mortgages, and longer term fixed-rate mortgages. Due to its structure, MFA Financial must distribute at least 90% of its annual taxable income to its stockholders. It has a 52 week trading range of $6.23 to $8.64, and for the year it is up by 1.5% trading at around $7 with a price to earnings ratio of 8.

MFA Financial has a book value per share of $7.42, and at its current price, is trading at a discount of 6% to its book value with a return on equity of 12%. This I believe makes it a solid value investment opportunity and a candidate for further investigation of its performance and how it compares to its competitors.

For the third quarter 2011, MFA Financial reported a 5% increase in earnings to $131 million and a 5.5% rise in net income to $82 million. During this period, its balance sheet weakened with cash and cash equivalents dropping by a massive 20% to $9 billion and long-term debt rising by 7.5% to $135 million.

In comparison to its competitors, MFA Financial is a solid value investment opportunity. Public Storage (PSA) the largest diversified REIT by market cap of $23 billion, is up 35% since the start of 2011, trading at around $133 with a price to earnings ratio of 44. It is trading at a 344% premium to its book value per share of $30.43 with a return on equity of 9%. Annaly Capital Management (NLY) the second largest diversified REIT by market cap of $16 billion, is up 3% since the start of 2011, trading at around $16 with a price to earnings ratio of 12. It is trading at a 1.5% premium to its book value per share of $16.24, with a return on equity of 9%.

When compared to Public Storage, MFA Financial is trading at a discount to its book value per share, rather than at a large premium and has a superior return on equity. In comparison to Annaly, MFA Financial is trading at a discount to its book value per share, rather than at a premium and is also delivering a superior return on equity.

MFA Financial is generating a solid profit margin of 62%, which means that it should be able to capitalize on any uplift in the economy, translating increased earnings into a healthy profit. It also pays a dividend of $1 per share, which is a highly attractive dividend yield of 14.4% and the second highest in its industry. I also believe that another indicator of MFA Financial being unfairly valued is its earnings yield of 13%, which is more than four times the current ten year Treasury bond yield.

For all of these reasons, I believe that MFA Financial, at current price, is undervalued by the market, and is a solid value investment opportunity that warrants further investigation and analysis.

Nokia Corporation

Nokia manufactures and sells mobile devices, and provides Internet and digital mapping and navigation services worldwide. It has a market cap of $20 billion, a 52 week trading range of $4.82 to $11.75, and for the year to date, has dropped 47% in value to be trading at around $5.

For the third quarter 2011, Nokia's earnings dropped by 3% to $9 billion, but net income rose by 82% to -$68 million. I noted that Nokia could lose market share to Samsung, which, so far, is turning out to be correct. For the same period, its balance sheet strengthened, with cash and cash equivalents rising by 15% to $11 billion, although long-term debt rose by 2% to $4.2 billion.

Nokia has a book value per share of $5.55, and at current prices, it is trading at a 5% discount to its book value per share. On initial appearances, this makes Nokia appear as an attractive value investment with assets exceeding liabilities, but on deeper analysis, I don't believe that Nokia is that attractive.

First, it has a return on equity of 4%, which for a stock trading at a discount to its book value, indicates further possible issues with the company and its balance sheet valuation. Secondly, it has a profit margin of -0.8%, and this indicates that it is experiencing difficulty converting earnings to net income. Thirdly, the company has an earnings yield of 4%, which when compared to current ten year Treasury bond yields, indicates that the company is moderately overvalued at current prices, as it doesn't factor in an appropriate risk premium above the risk free rate of return. Finally, it has an aggressive price to earnings ratio of 23, which further confirms that company is overvalued at its current price.

Nokia is also being substantially outperformed by its competitors with both LM Ericsson (ERIC) and Motorola Solutions (MSI) having superior returns on equity of 11% and 15% respectively, as well as superior profit margins of 7% and 6% respectively.

For all of these reasons, despite Nokia trading at a discount to its book value, I don't believe that it is undervalued at current prices. In fact, based on my analysis, I believe that the stock may continue to fall in value. Therefore, I do not believe that the company warrants further investigation or research.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.